Nikkei breaks through the 40,000-point barrier, investors are buying call options in droves, volatility rises alongside stock indices
The Nikkei 225 index has surpassed 40,000 points. Nomura Securities pointed out that both the stock index and volatility have risen, laying the foundation for a shift in sentiment in the options market towards a short-term increase. The skew of call options has sharply increased, and historical data shows that the stock index averages a gain of over 3% thereafter. It is expected that the Nikkei 225 index may briefly rise to 41,500 points, with technical indicators showing strong upward momentum in the market. Although the pressure from ETF dividends is not significant, the uncertainty surrounding the Senate elections may lead investors to take profits
After the Nikkei 225 index confirmed a breakthrough of the 40,000-point mark last Friday, Nomura Securities Research stated that this has formed a "dual positive pattern of rising stock indices and increasing volatility," and the shift in sentiment in the options market has also laid the foundation for further short-term gains.
On June 30, Nomura Securities pointed out in its latest research report that after several consecutive trading days of significant gains, the Nikkei 225 index clearly broke through the 40,000-point threshold last Friday, reaching a new high for the year, and the market is showing a "dual upward pattern of rising stock indices and increasing volatility."
Nomura Securities also mentioned that participants in the options market had previously maintained a cautious stance, but it seems they have now started buying index call options. The skew of call options has sharply risen, climbing above the historical 95th percentile, which lays the foundation for further increases in the Nikkei 225 index, at least in the short term.
It is worth noting that Nomura Securities believes that the upcoming ETF dividends will not pose significant pressure on the market, as the buying from CTA funds accumulating long positions may offset the related selling pressure.
Call Option Skew Soars, Historical Experience Points to Continued Gains
According to Nomura's historical data analysis, since 2010, on trading days following a sharp rise in call skew, the average increase in stock indices has exceeded 3%.
Nomura Securities noted in the report:
"If this is applied to the current situation, the Nikkei 225 index could potentially rise to around 41,500 points at least temporarily."
The report pointed out that based on analyst target prices slightly below 44,000 points, when the target return rate is below 5-6%, macro investors tend to become net sellers, thus 41,500 points is forming a resistance level above.
From a technical indicator perspective, the scenario of rising stock indices and volatility is forming, which usually indicates that the market may experience stronger upward momentum.
Nomura Securities' quantitative analysis shows that the current market structure and options flow provide strong technical support for the Japanese stock market, and investors should closely monitor the breakthrough of the key resistance level at 41,500 points.
However, Nomura Securities pointed out that considering the uncertain results of the upcoming Japanese Senate elections, it would not be surprising if investors sell to take profits.
CTA Buying Expected to Offset ETF Dividend Pressure
Nomura expects approximately 600 billion yen in ETF dividends on July 8 and about 900 billion yen on July 10, but it is anticipated that not many investors will establish short positions in anticipation of ETF sell-offs for dividends before that.
Investors seem to still vividly remember the experience from early July last year when ETF dividends did not act as a catalyst at all, and the Nikkei 225 index instead reached a new high.
Nomura Securities stated, just like last year, CTA funds are stirring the market by accumulating long positions. The Nikkei 225 index breaking through 39,500 points has attracted CTA funds to increase their long exposure.
According to Nomura's estimate of the "natural" positions of CTA funds over the next four weeks, approximately 600 billion yen of net buying in Nikkei 225 index futures is expected. Such a scale of buying may be sufficient to offset any selling pressure related to ETF dividends.
For reference, Nomura expects that the combined dividends on July 8 and July 10 will amount to approximately 11 trillion yen for the TOPIX ETF and about 400 billion yen for the Nikkei 225 ETF.
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